More pessimistic than the Government, EC forecasts a deficit of 0.3% in 2026

The European Commission is more pessimistic than the Portuguese Government about budgetary performance, forecasting a zero balance this year and a deficit of 0.3% of Gross Domestic Product (GDP) in 2026. In its autumn economic forecasts, released on Monday, Brussels also points to an economic growth of 1.9% in 2025 and 2.2% in the coming year.

Overall, the EU executive maintains or slightly improves its projections for the main Portuguese economic indicators compared to the report released in May, with the exception of the balance forecast for this year, which goes from a surplus of 0.1% to 0%. However, when compared with the scenario expected by the Ministry of Finance, two points stand out: on the one hand, the Commission validates the GDP forecasts; on the other, it does not believe that budget surpluses will continue from 2026 onwards.

“Previous budget surpluses are expected to decline, with an estimated deficit of 0.3% of GDP in 2026, while public debt is expected to continue to decline to less than 90% of GDP by the end of the forecast horizon [2027]”, the analysis reads.

The Portuguese Government forecasts a budget surplus of 0.3% this year and 0.1% next year. While most economic institutions agree on a positive balance for 2025, with forecasts ranging from 0% to 0.2%, for 2026, Finance Minister Joaquim Miranda Sarmento is alone in his conviction, with institutions expecting a return to deficits (with the exception of the International Monetary Fund, which forecasts a zero balance).

At a press conference, European Commissioner for the Economy Valdis Dombrovskis justified Brussels’ greater caution in relation to the Portuguese government’s forecast. “The main factors of difference are related to the Commission’s slightly more cautious estimates of expenditure growth and, in particular, current expenditure”, he said.

According to the report, Brussels projects solid revenue growth for 2025, benefiting from indirect taxes and social security contributions as a result of dynamic economic activity and the labour market. This behaviour makes it possible to offset, albeit “only partially”, the sustained increase in expenditure, since direct tax revenue is expected to grow below nominal GDP, reflecting policy measures such as changes to personal income tax.

Furthermore, it points out that civil service wage increases and pension bonuses, among other expenditure measures, are likely to weigh on current expenditure, while nationally financed public investment is expected to be “robust”, partly due to investment in defence. “As a result, the budget balance is expected to fall to 0.0% of GDP in 2025, compared to 0.5% of GDP in 2024”, it points out.

For 2026, it forecasts that the balance will turn into a deficit of 0.3% of GDP — down from the -0.6% it expected in May — “reflecting the impact of new permanent measures that deteriorate the balance”, and that interest expenditure will increase slightly, worsening to 0.5% in 2027. Among the risks identified by Brussels are the financial vulnerabilities of state-owned enterprises and the liabilities of public-private partnerships (PPPs). Overall, it forecasts that fiscal policy will remain expansionary in 2026, becoming contractionary in 2027 due to lower support from EU-funded expenditure.

Domestic demand supports growth

The European Commission predicts that domestic demand will continue to support economic growth in Portugal, despite uncertainty in global trade. In this regard, it projects that, after GDP growth of 2.1% in 2024, the economy will grow by 1.9% this year (in May it predicted 1.8%) and 2.2% in 2026, forecasts that compare well with those of the Ministry of Finance, which anticipates 2% for this year and 2.3% next year.

“Private consumption is expected to continue to grow at a steady pace over the forecast horizon, due to rising household income and a gradual decline in the high savings rate recorded in 2024 and the first half of 2025”, the EU executive notes.

Brussels also expects investment to grow even faster than private consumption in 2025 and 2026, when the use of Recovery and Resilience Plan (RRP) funds will peak. At the same time, it anticipates a faster pace of growth in imports than in exports, although it notes that the difference is expected to narrow from next year onwards.

With regard to inflation, it forecasts a reduction to 2% in 2026 and 2027, driven by “the recent fall in energy and industrial goods prices and a slight slowdown in service prices”. Unemployment is expected to “decline further” while “strong job creation” continues.